New England Banks Employ Yankee Ingenuity in Fight Over Deposits

The region has always had competitive deposit markets, and healthy loan growth has only heightened the need for low-cost liquidity. So leaders of banks such as Webster Financial, People's United Financial and Independent Bank are searching for affordable ways to support their commercial lending.

Those institutions are relying on a number of strategies, ranging from unique acquisitions to targeted employee incentives, to boost deposit levels while limiting downward pressure on net interest margins. Their efforts are worth noting; interest rates will rise in the foreseeable future, which in turn will make deposit-gathering more important to growth-minded banks.

"It's certainly frustrating to be at 0% rates for six years and have margin compression," Jack Barnes, president and chief executive of People's United, said during a presentation at a Wednesday conference hosted by Keefe, Bruyette & Woods.

"You have a choice," Barnes added. "Pull back and start shrinking the company or continue to build relationships... knowing that on the other side I'm going to have built a lot of very valuable relationships in the franchise that's going to create a lot of value and a lot of profitability as spreads and margins normalize."

Barnes is an avowed builder. Since the end of 2009, the Bridgeport, Conn., company's asset size has grown by more than 70%, to nearly $36 billion, due to acquisitions and expansion in targeted businesses, including asset-based lending, and markets such as Boston.As a result, the company's balance sheet is now slightly out of whack, with a loan-to-deposit ratio of 101% at the end of last year.

While using brokered deposits as a stopgap measure, People's United has also been working to boost commercial deposits by tying incentives to a relationship manager's ability to land a client's deposit business. As a result, the company's commercial deposits jumped 13% last year, to $7.2 billion.

"We're getting real results from changing initiative and changing focus," Barnes said. "The first priority is to grow the core and we are doing a lot of things to make that happen. We have some very good funding alternatives in meantime."

Webster Financial in Waterbury, Conn., has invested heavily in expanding its health savings account business to secure low-cost deposits, executives said during their presentation at the KBW conference. The $22.5 billion-asset company recently bought JPMorgan Chase's HSA business.

The deal added roughly $1.3 billion of deposits, boosting Webster's overall deposit base to $17 billion, Charles Wilkins, an executive vice president in charge of Webster's HSA division, told conference attendees. "These accounts are sticky, they last a long time, and we generate fee income with these accounts, as well," he said.

The JPMorgan deal was a key step in Webster's larger goal to expand its commercial lending business.From 2004 to 2014, HSA deposits tracked the company's loan growth, with net loans expanding by about $2.2 billion and HSA deposits increasing by $1.8 billion.

"HSA Bank has been a great asset and a real differentiator for us," said John Ciulla, Webster's executive vice president of commercial banking.

A defining aspect of Webster's strategy to rely on HSA deposits is the business's projected growth in the coming year. Less than of commercially insured employees nationally use HSAs, but that number is expected to spike as more companies switch to high-deductible health plans, Wilkinssaid.

For Webster, where HSAs fund about 10% of total deposits, that means more liquidity to fund loan growth. "There's a lot of upside... and we plan to take a nice chunk of that upside," Wilkins said, adding that national HSA deposits are expected to double in the next three years.

Expanding Webster's HSA operation would also allow the company to continue to enter new markets in the Northeast. In the last decade,the company has expanded into major metropolitan areas, including Boston, Philadelphia, New York, Washington and Providence, R.I.

Executives at Independent Bank in Rockland, Mass., noted that commercial clients have maintained higher-than-normal levels of deposits because of economic uncertainty.

"They're not buying a lot of equipment and they're not investing like they would in a different environment," Robert Cozzone, the $6.4 billion-asset company's chief financial officer, said during his remarks at KBW's conference.

Roughly 80% of Independent's $5.6 billion of deposits are classified as core deposits, Cozzone said. Rising interest rates could trigger an outflow of some liquidity, though management said higher loan yields should more than offset any fallout from deposit attrition.

Independent completed its purchase of Peoples Federal Bancshares in Brighton, Mass., earlier this week. The deal provides a golden opportunity to cross-sell products and services, such as investment management, home equity and mortgages.

"I toured the branches on Monday... and unlike any other acquisition, we were already getting referrals on day one," Christopher Oddleifson, Independent's chief executive, said. "It was really extraordinary, and the esprit de corps and the level of camaraderie I saw as I traveled in these branches was unusually high."

Kristin Broughton, John Reosti and Jackie Stewart are reporters for American Banker.